Outlook 2025: DC investors hunt out private markets opportunities

Private assets are a priority for many DC investors as they look towards the new year – perhaps unsurprising given the government’s drive for increased allocations to these asset classes.

Legal & General Investment Management (LGIM) is one of several asset managers to have entered the space this year with its Private Markets Access Fund, which launched in July.

The firm’s head of DC investments Jesal Mistry says 2025’s focus will be “integrating private markets into DC pensions”.

“To achieve investment across the spectrum [of private markets] you need to have a broad depth of diversified assets,” he says. “These are also illiquid assets and tend not to fit the daily dealing element of DC.

“There are several things you have to go through before you can make private assets work, so it’s important to think it through properly. We’ve been looking at this for two years already, speaking to clients and consultants extensively.”

Making private assets work

Franklin Templeton is another fund house targeting private assets for DC investments. Lee Hollingworth, the firm’s head of UK retirement, says this area is getting more interest following chancellor Rachel Reeves’ Mansion House speech last month.

Expecting more launches in 2025, Hollingworth is seeing greater attention from how asset managers can invest in private assets without inflating prices.

“The way to achieve this is to offer another fund separately, running the two alongside each other,” explains Hollingworth.

“From day one the amount of capital invest will be quite small because they want to create a performance track record that gives employers and advisers conviction.”

Mark Fawcett, CEO at Nest Invest, also sees merit in private assets – picking out property and timberland in particular – and points to an uncertain and volatile outlook as necessitating the need for greater diversification.

Fawcett says this is the priority for Nest in 2025, with the master trust also seeking stronger alignment with net zero opportunities.

“At Nest, we have already started to put in place mandates to help us invest into these opportunities, often directly,” he adds. “Nest has around £10bn invested in UK assets, representing a fifth of our portfolio including in renewable energy and private equity. By 2030, we expect this to grow to £20bn.

“Our research shows there are excellent UK investment opportunities in the pipeline, particularly across private asset classes, including property, infrastructure and renewable energy projects.”

The year of the LTAF?

Long-term asset funds, or LTAFs, have emerged as an option for DC schemes seeking to access private markets since the Financial Conduct Authority first approved the new structure in 2021.

Schroders launched the first LTAF in 2023, and since then other asset managers such as Aviva, Fulcrum, WTW and LGIM have brought similar products to market.

Alison Leslie, head of DC investment at Hymans Robertson, is expecting more LTAF launches in 2025.

“We are increasingly seeing a pipeline of UK investment opportunities in private assets with newer LTAFs – for example social housing or climate transition solutions within the UK,” she says. “We expect this to continue with increased focus from the Treasury and the chancellor.”

Nest has not used an LTAF to date, but Fawcett says the merits of this structure could garner greater attention from other schemes.

“We do believe they could make a big difference for DC schemes seeking to access private and illiquid investments, particularly those that are on insurance platforms and may need a potentially more liquid solution than traditional private market fund structures typically offer,” he adds.

Time to innovate

Next year won’t just be busy from an asset allocation perspective. It’s clear among experts that innovation is required to ensure investment products can support retirement more meaningfully.

Here, Hymans Robertson’s Leslie says there is still room for “significant developments” in both the accumulation and decumulation phase for investments.

“Further diversification and use of differing strategies such as multi-asset credit and index-linked securities have a place in [portfolios] given the different macro-economic landscape we find ourselves in,” she says.

In agreement is Franklin Templeton’s Hollingworth who, while excited about private assets, believes more innovation is required.

“The challenge of retirement income is how do you create a structure that can support the majority of DC members at the point of retirement who will want to remain invested while giving them an income?” he says.

“It’s a challenge we in the UK industry faces, but it’s also a global one and no one has fully solved it.”

Further reading

DC funds more open to real assets: Aviva (29 January 2024)

Phoenix, Schroders team up to launch DC-focused asset manager (31 July 2024)

How the government plans to scale up DC schemes (15 November 2024)

What the government’s own numbers say about investing in private markets (26 November 2024)